By Zhu Hongming, Research Team on "Study of Non-government Financial Development in China", Research Institute of Finance of DRC

Research Report No 55, 2015 (Total 4740)

Abstract:

High interest has become an impediment to both the healthy development of non-government financial organizations such as small-loan companies, pawns and non-government capital management companies, as well as to the service efficiency provided to the real economy. This paper takes small-loan companies as an example to calculate the lower loan limit implicitly included in the expected rate of return for stockholders. According to the calculations, high interest rate is an inevitable choice that small-loan companies have to take against the background of low leverage ratio. Hence low leverage ratio is an important reason leading to high leverage ratio for non-governmental financial organizations. To effectively lower the high interest rate in non-government financial organizations, its leverage ratio should be raised. Thus the following measures should be taken. First, a compatible approach towards risk spillover and leverage ratio should be taken objectively and comprehensively. Second, the low-cost financing channels should be expanded. And third, the upper-limit of leverage ratio should be lifted appropriately, together with more efficient and proper financial supervision.